Geopolitical tension and impact on Indian market

October 12, 2023

In situations of geopolitical tension or war, there exists a typical sequence of events that unfolds as follows:

· Rising Oil Prices: Geopolitical tensions often lead to an increase in oil prices.

· Heightened Inflation: The rise in oil prices contributes to higher inflation.

· Elevated Interest Rates: To combat inflation, RBI may raise interest rates.

· Slower Economic Growth: Higher interest rates can result in slower economic growth.

· Diminished Corporate Profits: A slower economy can affect corporate profits.

· Reduced Earnings per Share (EPS): Lower corporate profits can lead to decreased earnings per share.

· Declining Stock Prices: As a consequence, stock prices may decrease, negatively impacting the stock market.

However, a recent, noteworthy exception was observed the day following the Israel-Hamas conflict when the market surprisingly saw a 1% increase. This has prompted questions about why this particular geopolitical event did not have an immediate impact on the stock market and whether this trend will persist if the conflict continues.

My analysis, based on various experts' advice, sheds light on this scenario:

Currently, in India, total Equity Mutual Fund Assets amount to 25 lakh crore, with 5% reserved as liquidity, totaling 1,25,000 crore. Furthermore, Dynamic Asset Allocation Mutual Fund Assets are valued at 2 lakh crore, with 40% typically allocated to debt, amounting to 80,000 crore that can potentially be reallocated to equity. Additionally, there is a SIP book of 15,000 crore per month, resulting in a 3-month SIP book of 45,000 crore.

This means that fund managers currently possess a total liquidity of 2.5 lakh crore. While there might be some outflows, it is not a prevailing trend at the moment.

What does this signify? It suggests that even if the market experiences a downturn, fund managers have substantial liquidity (2.5 lakh crore) that can be utilized to seize opportunities in the equity market. This is one of the factors contributing to the absence of immediate short-term impacts from the ongoing conflict. Nevertheless, it is acknowledged that continued conflict may have mid-term consequences.

For long-term investors, this situation may not have a significant impact; in fact, it may present an opportunity for additional lump-sum investments to capitalize on the market's conditions.

This blog reflects my analysis and understanding and is created for knowledge sharing purposes. However, it is strongly recommended that you consult your financial advisor before making any investment decisions

By - Ritesh Chaturvedi